European shares looked set to follow Asian equities higher on Wednesday and the euro steadied after Italian Prime Minister Silvio Berlusconi said he would resign, raising hopes the debt-ridden country would proceed with reforms that may keep Europe's debt crisis from spreading.
An easing in Chinese inflation also soothed fears about the world's second-largest economy, bolstering oil and copper prices and underpinning Hong Kong shares.
However, doubts that the European Union will be able to stop the sovereign debt crisis from spreading continued to fuel interest in safe-haven gold, pushing prices higher.
European shares were expected to rise, with financial spreadbetters expecting Britain's FTSE 100 <.FTSE> index to open up 1.2 percent, Germany's DAX <.GDAXI> to rise 1.7 percent and France's CAC-40 <.FCHI> to gain about 1.1 percent.
MSCI's broadest index of Asia Pacific shares outside Japan <.MIAPJ0000PUS> rose as much as 1.7 percent before trimming gains to around 1 percent, while Japan's Nikkei stock average <.N225> closed up 1.2 percent.
Berlusconi said on Tuesday he would leave office after parliament approves a budget law that includes reforms demanded by Europe, but Italy looks set for prolonged political uncertainty after his announcement.
The news helped stabilise the euro and prompted investors to buy back shares, but there is still uncertainty in the euro as reshuffling its leader alone doesn't guarantee Italy's fiscal situation will improve, said Yuuki Sakurai, CEO of Fukoku Asset Management.
Until the problem of sovereign debt, the last resort for investors, is resolved, investor preference for liquid assets such as cash and Japanese government bonds remains in place.
The euro held firm, pushing to $1.3835 against the dollar. The single currency rose as high as $1.3847 in New York on Tuesday.
China's annual inflation rate eased to 5.5 percent in October from 6.1 percent in September for a third straight month of decline from July's three-year peak and Premier Wen Jiabao said prices had fallen further since then.
Chinese producer prices rose 5 percent in the year through October, down from a 6.5 percent rise in the year to September.
Easing price pressures helped fuel expectations that China may start to ease monetary policy as exporters feel the impact from slowing global growth. But Beijing is not seen loosening its grip on the property market for now, despite recent signs of slowing sales.
Hong Kong's Hang Seng Index <.HSI> rose by around 2 percent while the Shanghai Composite Index <.SSEC> gained 0.3 percent.
Brent crude gained for a fifth day, rising 0.5 percent to $115.57 a barrel, and copper rose 1.5 percent, as factory output data affirmed China's economy is slowly moderating but not battling a sharp slowdown right now.
ITALY YIELDS SURGE
Berlusconi's resignation could come this month, with votes likely in coming weeks on Italian budget measures including austerity reforms to cut debt and bring borrowing costs under control.
The yield on Italy's benchmark 10-year bond hit a 14-year high of 6.79 percent on Tuesday, approaching levels seen in the government bonds of Portugal and Ireland when they had to seek bailouts.
Italy is the third largest economy in the euro zone and failure to fix its debt problems would have a far bigger impact on the region than difficulties in Greece.
Investor jitters over Italy's debt has kept the spread on Italian government bonds over Bunds to 490 basis points.
Despite the rise in riskier assets such as stocks and oil, and a firmer euro and the dollar, gold gained as much as 0.5 percent to $1,794.09 an ounce. It briefly rose above $1,800 on Tuesday, its highest in seven weeks, before falling on news from Italy.
While market focus has shifted to Italy from Greece, the situation in the euro zone is far from instilling optimism, said Yuichi Ikemizu, branch manager for Standard Bank in Tokyo.
Gold is underpinned by favourable factors, such as global growth slowdown and the euro zone debt problems.
Ikemizu said physical investors are sidelined given the high price level, but funds buying helped pushed prices higher.
The market was temporarily relieved by Italy's political shakeup, although Greece remained undecided on its next leader. Party leaders were locked in talks on a unity coalition, with the EU seeking an immediate deal to save the country's finances.
EU finance ministers failed to make progress on Tuesday on ways to shore up sagging banks and avert a credit squeeze, as rising borrowing costs for Italy make it more difficult for European banks to borrow as they are increasingly reluctant to lend to one another.
Such uncertainties over key issues kept gains in Asian credit markets modest.
The spreads on the iTraxx Asia ex-Japan investment grade index - a gauge of investor appetite for risk - narrowed by about 5 basis points early on Wednesday.
U.S. Treasuries also edge up slightly on Wednesday in Asia.
So what if Berlusconi eventually does the right thing? We'll rally for a period - maybe a day or two - then just sell off again, said a note from Societe Generale.
The Greeks have delivered nothing, there's growing feeling that Italy will possibly go the same way, the EFSF has been shown to be no panacea - and soon it won't even get funded.
Earlier this week, the European Financial Stability Facility, the euro zone's bailout fund, had difficulty finding buyers for 10-year bonds issued to support Ireland.
(Additional reporting by Umesh Desai in Hong Kong; Editing by Kim Coghill)